"we can do anything" ToS might be unconscionable, providing remedy for loss of music

MacKinnon v. IMVU, Inc., No. H039236  (Cal. Ct. App. Oct. 30, 2014)
MacKinnon sued IMVU, which runs an entertainment service, the “instant messaging virtual universe,” alleging that IMVU deceived users about music purchases and wrongfully restricted users’ ability to play music after they bought it.  He alleged conversion, breach of contract, and negligent misrepresentation along with California statutory claims. The trial court dismissed all of his claims because IMVU’s contract said it could do whatever it wanted to its customers.  The court of appeals reversed.
To get the IMVU app, users have to provide information and click the “Create IMVU Account” button on IMVU’s website. Below that button is small print stating “[b]y clicking Create IMVU Account you are indicating that you have read and agree to the Terms of Service Agreement and Privacy Policy,” and a hyperlink to the Terms of Service Agreement and Privacy Policy.
IMVU users have avatars and can buy virtual products for them using real money.  They can also buy audio products, including “trigger music,” audio clips or songs users play by typing the appropriate trigger.  IMVU users create audio products and submit them to IMVU’s catalog; users can listen to the full product before buying it by clicking a “try” button.  After a purchase, a screen pops up displaying the product and the phrase “You own this.” IMVU’s site says that purchases are “available to be used whenever you like.”  The ToS, however, say that IMVU can do anything at any time, that users have no rights in anything they buy (called a “license” in the ToS, naturally), that purchases are nonrefundable.
In 2008, IMVU announced that, because of bandwidth issues, “new products submitted” to the virtual catalog would be “cut down to 20 seconds,” but that the restriction “will not affect products already in the catalog.”  In 2011, IMVU applied the 20 second limit to all audio products, including previously purchased ones, and said that refunds would be offered only for purchases made on or after December 1, 2010.  MacKinnon, however, had already spent hundreds of dollars on IMVU credits, and when he bought audio he sampled them using the “Try” button to make sure it was full length and not limited by the 20 second rule.
The court first found that the contract indeed said that IMVU could do whatever it wanted with respect to the files.  MacKinnon argued that this interpretation rendered the contract terms unconscionable.  Oppression and surprise are the relevant factors in procedural unconscionability.  As to oppression, the availability of alternative online social gaming platforms and the “nonessential nature” of the recreational activity made the degree of oppression low.  (This undercounts the stickiness of particular sites: the operator intends to become important to the consumer, and the consumer may find it very difficult to leave once s/he spends significant time on a platform because of the social connections there—given the relational nature of the service and the operator’s intent that the consumer become invested, this conclusion doesn’t make sense in the context of contracts that consumers just don’t read.)
As to surprise, the ToS was a 10-page, single-spaced document. The provision at issue appeared in the Terms and Conditions of Sale section, where the court said one would expect to find it (though note that it’s called “sale”), in the same typeface and font as most of the document.  So the agreement didn’t call special attention to the no-refund provision, but it wasn’t hidden in fine print. And length alone doesn’t establish surprise.  (In other words, we’re just going to pretend that consumers read these contracts; nothing to see here—literally nothing to see, since it was just a hyperlink.) Thus “we cannot say the element of surprise is present.”
As a result, the court of appeals concluded, there was a low degree of procedural unconscionability. Comment: Contrast empirical research on consumers’ practical ability to read and understand multiple pages of text, presented online, when they have to do that with every service they encounter.  See, e.g., Jeff Sovern  et al., “Whimsy Little Contracts” with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements. I’d say procedural unconscionability is routinely high.  That it might go higher in more concentrated markets doesn’t make it absolutely low. (Indeed, I’m not convinced consumers can figure out terms well enough to use differences to judge competitors and thus competitors will rarely if ever compete on contract terms and competitive markets will still be packed with unconscionable terms.)
Substantive unconscionability: contracts of adhesion are substnatively unconscionable when they’re overly harsh, unduly oppressive, so one-sided as to shock the conscience, or unfairly one-sided.  It’s not just a bad bargain, but a contract that’s unreasonably favorable to the more powerful party: there’s no justification for the contract’s one-sidedness, and the allocation of risks or costs is overly harsh given the circumstances. The court of appeals found that the record was insufficient to make that determination, which depends on a contract’s “commercial setting, purpose, and effect.”  Thus, the court of appeals considered whether the dismissal could be affirmed on other grounds.
CLRA: the complaint alleged that IMVU violated the CLRA by deceiving users into believing that full-length audio products would not be truncated and by including unconscionable provisions in the ToS.  MacKinnon pointed to (1) IMVU’s announcement that the 20-second restriction “will not affect products already in the catalog” and (2) the message “You own this” that users received after purchasing audio products. He alleged that these constituted representations that the goods at issue had characteristics or qualities they didn’t have; that IMVU had advertised goods/services with intent not to sell them as advertised; and that IMVU had represented “that a transaction confers or involves rights, remedies, or obligations which it does not have or involve,” as specifically barred by the CLRA.  (I like that last theory!  If online services insist that they aren’t making “sales,” they darn well ought to stop telling us that they are.)
A CLRA deceptive conduct claim requires conduct that was likely to mislead or deceive a reasonable consumer, which is usually a question of fact, and a causal connection between the defendant’s allegedly deceptive representation and the alleged harm—reliance.  IMVU argued that, in view of the ToS, no reasonable consumer was likely to be deceived.  But a factfinder could conclude otherwise based on the September 2008 announcement and the “You own this” representation.  Regardless of the ToS provision (which may or may not be enforceable), it was possible that reasonable consumers would be misled.  Even if the September 2008 announcement was true, true statements can be misleading.  “A reasonable consumer may have understood those representations to mean that IMVU would not exercise any contractual right to truncate certain audio products postpurchase.”  The CLRA makes consumer protection claims available when collateral representations differ from contractual language. 
And then the court of appeals muddies the waters by stating that “[w]hether a reasonable consumer who read the Terms of Service Agreement and the representations would have been misled by the latter is a question of fact.”  So reasonable consumers, as a matter of law, read the contract—and what is the level of understanding of such consumers?  Can they read at a twelfth-grade level?  Anyway, MacKinnon adequately alleged deceptive conduct. He also alleged reliance, at least as to the September 2008 announcement, which he alleged he reviewed; he never specifically alleged that the saw the “You own this” statement.  (Did he see the “buy” button?  Why wouldn’t “buy” indicate that he had “bought” the particular item he sought to buy?)  And MacKinnon didn’t show there was a reasonable possibility of curing the defect in the pleading by amendment.
The CLRA also allows unconscionability-based claims where an unconscionable provision in a contract is intended to result in or which does result in the sale or lease of goods or services to any consumer. MacKinnon couldn’t state a claim based on the class action waiver because IMVU hadn’t yet sought to enforce that term of the agreement against MacKinnon, so he hadn’t suffered any damage, but as to the unconscionability discussed above he did state a claim.
UCL fraud, FAL, and negligent misrepresentation claims also survived as to the September 2008 announcement.
Conversion: Conversion requires actual interference with ownership or right of possession.  IMVU argued that MacKinnon had no property rights in the audio products because of the ToS stating (1) “you acknowledge that you have no right, title or interest in or to this Site, any Products, Materials or Software”; and (2) “Credits” “can . . . be exchanged on this Site for limited license right(s) to use a feature of our Product or a virtual product when, as, and if allowed by IMVU and subject to the terms and conditions of these Terms.”
But the first provision was inapplicable, since IMVU carefully distinguished in the ToS between “Products” it offered and virtual products created by third party users (Submissions), which was what MacKinnon bought. And the second provision didn’t define the scope of the user’s license rights or whether they included any ownership interest. 
Breach of contract claims also survived based on MacKinnon’s acceptance of IMVU’s post-September 2008 offering of full-length audio products for purchase.  This claim wasn’t based on the ToS itself, but an alleged subsequent contract, so the claim was that the parties subsequently implicitly modified their integrated writing.
Also, a breach of the implied covenant of good faith and fair dealing was adequately pled, even though the ToS might expressly authorize truncating audio products. A discretionary power must still be exercised in good faith.  However, courts can’t imply a covenant directly at odds with a contract’s express grant of discretionary power “except in those relatively rare instances when reading the provision literally would, contrary to the parties’ clear intention, result in an unenforceable, illusory agreement.”  If the no-refund portion of the contract, which gives IMVU unfettered authority to truncate audio products without a refund, is enforceable, then no covenant of good faith and fair dealing could be implied; if it was unconscionable, then there was also a claim of a breach of the covenant.  (OK, I’m not a contracts person, but this seems … weird.  I thought the whole point of the covenant of good faith and fair dealing was to make contracting parties exercise their discretion within some boundaries, even when the contract provision at issue was valid.)
However, MacKinnon couldn’t bring a Song-Beverly Act breach of warranty claim because he didn’t buy the audio products in California, but rather in Utah where he resided.

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